IU forecasts modest growth in 2008

November 1, 2007

Sounding downright Greenspanian, economists at Indiana University's Kelley School of Business said this morning they are "cautiously optimistic" that 2008 will be a year of modest growth.

The U.S. economy will grow 2.5 percent, less than the 3 percent they expected for 2007, they said during the business school's annual breakfast meeting downtown. Indiana's economy will expand 2 percent. And inflation will slow to about 2.6 percent.

"During the past year, the U.S. economy has essentially been in survival mode," said Bill Witte, co-director of the university's Center for Econometric Model Research. "The good news as the year draws to a close is that we seem to have avoided intensive care. The not-so-good news is that the impediments to full recovery are not diminishing.

"Nevertheless, we expect the economy will avoid a crisis and continue to muddle through."

His remarks were included in an advance copy of the forecast IU shared with IBJ.

Witte pointed to two "basic pathogens" plaguing the nation's economic performance: the ongoing struggles of the housing sector and the continuing increase of energy prices. He noted that oil has risen from $64 per barrel to $94 per barrel in just one year.

But he said strong international trade, business investment in infrastructure and high-tech equipment, and consumer spending are helping offset the impact.

The coming year will be another survival success, Witte said. Housing won't collapse despite pressures from several directions. "While there are definitely risks, there are enough positives to sustain moderate economic growth," he said.

Jerry Conover, director of the Indiana Business Research Center at the Kelley School, agreed with the mixed outlook. He said the nation will add about 1.1 million jobs next year, which would be less than in 2007. He expects the U.S. unemployment rate to rise from 4.7 percent to 4.9 percent near the start of the year and then to hold fairly steady. Conover projects Indiana will add about 15,000 jobs next year, which would be a growth rate below the national average.

"While income growth in the state continues to lag behind the nation and employment growth will be modest, some sectors will show refreshing strength, and new jobs will outpace lost ones in many parts of the state," Conover wrote.

Conover expects Indiana's manufacturing sector, buoyed by the new Honda plant in Greensburg, to "hold its own." Total Hoosier personal income will grow about 4 percent, which would be more slowly than the rest of the nation.

Philip Powell, clinical associate professor of business economics and public policy and chair of the evening MBA program at the Kelley School, said the Indianapolis metropolitan area will see real growth of 1 percent to 1.5 percent. Powell expects local job numbers will grow between 1.5 and 2 percent.

A weak dollar will help local manufacturers export more products. The housing market will hit bottom and begin to grow in tiny spurts. And the low cost of living will help attract outside businesses, he said.

"Previously established momentum in Indianapolis income growth faded between 2006 and 2007 and the city has returned to its former status as a lagging economic performer," Powell said. "The Indianapolis economy will inch forward in a lackluster way in 2008."

This morning's meeting was one of a series of 10 scheduled across the state through Nov. 16.
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